Having faith in your investments takes on a new meaning with this sector of mutual funds; Carolyn Bigda of Kiplinger’s Personal Finance looks at faith-based funds whose stock and bond selection process take religious views into account.
Steven Halpern: Our guest today is Carolyn Bigda of Kiplinger’s Personal Finance Magazine. How are you doing today, Carolyn?
Carolyn Bigda: I’m great, thanks.
Steven Halpern: Thank you for joining us. Today, we’re going to look at a subsector of the mutual fund industry that many people don’t even know exists. Your latest article discusses faith-based funds. Could you explain what these are?
Carolyn Bigda: Sure. These are funds—actually, they’ve been around for several years—but like you said, they’re the small corner of the mutual fund industry and, essentially, these are funds that are going to invest based on a set of religious principles, so whether that’s Christian, more specifically, Catholic or Islamic, they will, sort of, tailor their stock or bond selection based on some of their religious screens.
Steven Halpern: Interesting when you note that an investor doesn’t necessarily need to share the funds religious views in order to still see that it’s worthwhile for considering the funds. Could you expand on that?
Carolyn Bigda: Sure, yeah, you don’t have to be a Catholic to invest in a Catholic fund. These are open to any and all investors, generally speaking, and then, in a lot of cases, these funds are using screens that might appeal to any investor, so they’re looking for companies that are growing their businesses, trade at fair values, and, in some cases, the screens will cut out companies or industries that aren’t very attractive these days.
Tobacco is one example. A slower growth industry, obviously now, so in a lot of cases, tobacco companies don’t make the religious screen cut and so if that appeals to you as an investor, then you might want to consider one of these funds.
Steven Halpern: Now, you also caution in your article that there are some negatives to these funds for investors to keep in mind. Could you clarify that?
Carolyn Bigda: Sure, so, on the flip side, a lot of these funds may be cutting industries or sectors—based on their religious screens—and that could be a good thing but it could also be a bad thing if it limits your diversification.
The other sort of hang-up we found with these funds is that because they are smaller, they tend to have maybe fewer assets or are offered by smaller mutual fund companies. The fees tend to be higher than what you might find in a comparable, say, large US stock fund so those are some things to keep in mind as you explore these options.
Steven Halpern: Okay, so let’s take a look at some specific funds, and one you highlight is the LKCM Aquinas Value Fund (AQEIX). Could you tell us about that?
|pagebreak|Carolyn Bigda: Sure, this is a Catholic fund so it’s following the guidelines that are set by US Conference of Catholic Bishops and, sort of, based on that, there are various screens that they’ll do based on that.
Some of the main ones are: they won’t invest in firms that deal with abortion, birth control, and pornography, and certain weapons. Usually it’s weapons of mass destruction and that kind of thing. But, in addition, once they do that screen the fund manager is looking for, again, sort of the same type of things that any investor would.
You know, companies that are generating a high return on invested capital, that kind of thing, and so, over the long-term, this fund has had a pretty good performance, especially compared with the S&P 500, so it’s had a pretty good run and it’s not especially cheap. It charges about 1.5% in annual fees, but it’s not super expensive either.
Steven Halpern: Another fund that you highlight is the Ave Maria Rising Dividend Fund (AVEDX). Can you tell us about this?
Carolyn Bigda: This is an example of how you can have variations in religious funds that fall under the same doctrine. This is also a Catholic-based fund but they’re following sort of different investing rules. This fund avoids companies with ties to abortion and pornography as well, but they don’t necessarily screen out weapon makers.
They take a very strict line to pornography. They even exclude hotels that will offer X-rated films in their guest rooms so there are different variations on how funds follow these rules.
But with that screen, they only eliminate about 150 companies from the Russell 3000 Index and from there, the managers are looking for businesses with rising sales, earnings, and cash flow, all those kinds of things and, especially, they’re looking for companies that are able to increase their dividends and this fund has also had a pretty good long-term track record and annual fees are less than 1%.
Steven Halpern: The same fund family also offers a fixed income alternative for the Ave Maria Bond Fund (AVEFX). What’s the story there?
Carolyn Bigda: Yes, so, they’re going to apply the same Catholic principles in their stock collection—excuse me—their bond collection, this is a bond fund. So they’re doing that by looking for corporation bonds.
They also hold Treasuries and the Treasuries aren’t held up to that screen. They just invest in Treasuries and then that’s the majority of the fund and 15% of the fund is also invested in dividend paying stocks, so it’s a little bit of a blend but it’s mostly a bond fund and, again, they’re using sort of the same principles to make their bond fund selections on the corporate side and it has also had a fairly good track record too.
Steven Halpern: Well, we really appreciate you joining us today and helping to highlight a sector of the market that might be new to a lot of investors, so thank you again.
Carolyn Bigda: My pleasure.
